Economic analysis of sequestered carbon trading between large final emitters and sequesterers of carbon

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Esuola, Adeyemi Gbolahan

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University of Guelph

Abstract

This study empirically analyzes sequestered carbon trading between large final emitters and sequesterers of carbon. The Canadian government has advocated the use of carbon trading as a way of meeting Kyoto Protocol emissions reduction target. Tremendous welfare gains potentially exist in emission trading for large final emitters (LFEs) given their high abatement costs, particularly if carbon offsets can be exchanged since the marginal cost of sequestering carbon in Canada has been adjudged to be lower than the abatement costs (equivalent units) of LFEs. However, the transaction costs and the problem of a carbon release of sequestered carbon have been argued to erode away any potential gains in the trade for suppliers of sequestered carbon (Weersink et al 2005). This study shows that even with huge transaction costs of carbon trading, there are still welfare gains in carbon trading, particularly if sequestered carbon is exchanged. Given a price elasticity of supply of 9.18, a market equilibrium price of $10.44/t CO2e for sequestered carbon was determined when emitters buy carbon from sequesterers as against a price of $246.74/t of CO2e when the LFE trade with each other. In this thesis, we advocate the use of a carbon bank. The bank or aggregator has a reserve of carbon against any unforeseen contingencies and defaults. Concerns regarding permanent or temporary credits in a carbon market are addressed within the bank system as carbon could be sequestered in perpetuity or for the number of years required for a permanent reduction. Related to the ability to deal with the permanence issue, the risks of carbon release, price and policy can be efficiently allocated with a carbon bank system. First, emitters will not be thrown out of compliance by any course of action taken by the sink generators because of the risk-bearing ability of the bank. Second, sink generators bear little or no liability when sequestered carbon is released or withdrawn from the bank. The system is also expected to reduce transaction costs significantly since the bank acts as an aggregator that can pool carbon credits from a variety of sources and act as a clearing house for the salable credits.

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sequestered carbon trading, economic analysis, carbon, transaction costs, carbon trading, sequestered carbon

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